Fears of Ex-Im price spikes ease as Fitch and Moody's affirm US rating

Source: Flightglobal.com
This story is sourced from Flightglobal.com

Fitch Ratings has affirmed the United States' long-term foreign and local currency issuer default and treasury security ratings at "AAA", less than two weeks after Standard & Poor's downgraded the country to "AA-plus" with a negative outlook. Moody's Investors Service affirmed its top US ranking last week.

Bankers interviewed by CAO say the move is important as now two of the three agencies have affirmed the US' top-tier rating, and two opinions are typically needed on financing transactions. However, one banker notes Standard & Poor's is "very much viewed as the most important ratings agency".

Standard & Poor's downgrade of the US prompted aviation financiers to speculate a lower US credit rating could require banks to apply capital to export credit loans, making the transactions more costly.

"If the US AAA rating disappears, then it will be mechanically more expensive to lend money against the signature of Ex-Im," said a banker, ahead of Moody's and Fitch's rating actions. "That would affect the bank market, but much more profoundly the capital markets and various conduits that have been absorbing Ex-Im paper at record low costs for years."

Another financier agreed and said ultimately it would be airlines that would feel the squeeze, as banks would be compensated for the downgrades by increasing their margins.

Fitch has simultaneously affirmed the US country ceiling at "AAA" and the short-term foreign currency rating at "F1+".

The outlook on the long-term ratings is stable.

Fitch says its affirmation of the "AAA" sovereign rating reflects the fact that the "key pillars of its exceptional creditworthiness" remains intact: The US' pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange rate flexibility "further enhances the capacity of the economy" to absorb and adjust to shocks, says Fitch.

However, the ratings agency will review the decision at the end of the year. If the US fails to implement "at least $1.2trn of deficit-reduction measures" than Fitch "would likely" take negative rating action.

US sovereign liabilities, both the dollar and treasury securities, remain the "global benchmark" and accordingly the US credit profile "benefits from unparalleled financing flexibility and enhanced debt tolerance, even relative to other large "AAA"-rated sovereigns".

Fitch's current assessment is that the US economic recovery will regain momentum and that a period of above trend growth will subsequently be followed by growth of at least 2.25% over the long term.

The gap between government cost of borrowing and economic growth - the interest rate-growth differential (IRGD) - is crucial, notes Fitch. The US IRGD has historically been more favourable than that faced by its high-grade and "AAA" peers, says Fitch. The rating agency expects this to continue over the medium term as low nominal and real interest rates persist, underpinned by the US's dollar's continued pre-eminence as the global reserve currency.

Fitch currently projects federal debt held by the public and gross general government debt stabilising in the latter half of the decade at 85% and 105% of GDP, respectively, higher than for any other currently "AAA"-rated sovereign.

In Fitch's opinion, this is at the limit of the level of government indebtedness that would be consistent with the US retaining its "AAA" status despite its underlying strengths. Higher levels of indebtedness would limit the scope for counter-cyclical fiscal policies and the US government's ability to respond to future economic and financial crises.